Hutchison confirms exclusive talks to buy O2 for £10.25 billion

Telefonica in discussions to sell UK operations to Three-owner which will create UK’s biggest network

Three-owner Hutchison Whampoa has confirmed it has entered exclusive talks to buy O2 from Telefonica in a £10.25 billion deal.

The Chinese company will now spend several weeks performing due diligence on the deal, which if completed will create the largest mobile operator in the UK with an estimated customer base of 34 million connections.

The deal would see Hutchison pay Telefonica an initial £9.25 billion, with another £1 billion due if the cash flow of the combined businesses reaches a pre-agreed figure.

A statement from Hutchison Whampoa said: “Hutchison Whampoa Limited, parent company of UK telecom operator Three UK, announced that it has entered into exclusive negotiations with Telefónica, S.A. over a period of several weeks for the potential acquisition of Telefónica, S.A.’s UK subsidiary, O2 UK, for an indicative price in cash of £9.25 billion, and deferred upside interest sharing payments of up to a further £1 billion in the aggregate payable after the cumulative cash flow of the combined businesses of Hutchison 3G UK Limited and O2 UK has reached an agreed threshold.”

“The timing and amounts of these payments will depend on the actual cash flows of the combined businesses. The transaction remains subject to satisfactory due diligence over O2 UK, agreement on terms and signing of definitive agreements, and obtaining required corporate and regulatory approvals. The negotiations may or may not result in any transaction.

“Three UK, a subsidiary of HWL is the UK’s fastest growing 3G network operator covering 98% of the UK population and is now rolling out 4G to its customers. It has won awards for Mobile Broadband, Roaming and Customer Support as well as for Best Value.”

O2 awaits outcome

O2 is currently the UK’s second biggest network with 24 million customers, while Three has less than 10 million, according to its last financial results. The combined entity would leapfrog EE (28 million) to become the UK’s biggest operator with around 34 million customers.

Telefonica had previously been in talks to sell its UK arm to BT, but the broadband provider opted to enter exclusive talks to buy EE in a £12.5 billion deal, leaving O2 open to the bid from Hutchison.

O2 confirmed the talks, with an O2 spokesperson saying: “We await the outcome of Telefónica’s exclusive negotiations with Hutchison Whampoa. Subject to agreement as a result of these negotiations and any necessary approvals including merger clearance, this will strengthen our future as a leading, and highly trusted UK communications provider at a time when the demand for mobile connectivity has never been greater.

“Three is known for campaigning on behalf of its customers, much like O2. We are confident that an agreement will mutually benefit the customers of both companies, as well as drive better value, quality and investment in one of the most digitally competitive countries in the world.”

Any potential merger will be closely watched by regulators, with Ofcom expressing a preference for maintaining four networks back in 2011. The deal could also require approval from the European Commission.

The EC has approved similar deals in Europe during the last few years as the telecoms market moves towards more consolidation. In Germany, Telefonica completed the purchase of rival E-Plus for €8.6 billion (£6.5 billion).

Hutchison also completed the purchase of Telefonica’s operations in Ireland last year in a €780 million deal.

Both deals received backing from the EC after the buyers agreed to concessions including the release of some of the combined spectrum to MVNOs.

According to the BBC, Hutchison Whampoa group finance director Frank Six, pointed to these deals as proof that regulatory approval could be gained.

“The European Commission has taken a positive view of four-to-three consolidations of mobile in three cases now…and we believe that the precedents that they have set in those transactions will apply for this transaction,” he said.